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China's tax revenue will continue to grow at a higher rate over the next few years. In 2003, the country is expected to see a faster growth in private investment, suggesting the internal growth mechanism has been developing.
Foreign direct investment, which contributed a great deal to China's gross domestic product (GDP) growth last year, will experience a steady growth.
A number of "hot consumption areas" such as housing, cars and education will continue to have great effect on overall consumption.
China's foreign trade, although suffering a deficit of US$1 billion during the first quarter of 2003, will enjoy a surplus for the whole year.
The Chinese economy is expected to grow by more than 7.5 percent in 2003.
Sound economic development, an improvement in companies' economic efficiency and the end of tax favors enjoyed by some companies will all lay a solid foundation for the country's tax revenue growth.
The country will also step up the fight against tax evasion.
However, a number of other factors, such as a cut in the business tax rate for financial and insurance companies and a cut in tariff duties following China's accession to the World Trade Organization will have negative effects on the tax revenue growth.
During the first quarter of this year, tax revenue rose 26.6 percent compared with the same period last year to 500.7 billion yuan (US$60.3 billion).
The higher growth was a continuation of the faster revenue growth witnessed in the second half of last year.
It was also based on the relatively low figure for the same period last year.
It will be unrealistic to maintain the rate throughout the year.
When taking into account all positive and negative factors, the country's tax revenue is likely to grow 13 percent to 2 trillion yuan (US$240 billion).
The contribution by the GDP growth to the tax revenue growth will also increase.
The relationship between GDP growth and tax revenue growth will become more harmonious.
In a realistic situation, the rate of tax revenue growth should be 0.8 times or 1.2 times that of GDP growth.
The Chinese economy will continue to grow at a rapid pace in 2004 and 2005, the last two years of the country's 10th Five-Year Plan (2001-05).
The guidelines and policies implemented in 2001 and 2002, which tally with China's real situation, will continue.
The government will also take a series of new measures to fuel the country's economic development.
China is expected to make greater progress in aspects such as economic structural adjustment, financial mechanism reform and "tax-for-fees" reform in rural areas during the two years.
Tax System
With an aim to achieve the goal set for the 10th Five-Year Plan, China should devote greater attention to key issues in the present's tax system.
The government should speed up tax system reforms, especially the reform on key tax varieties such as enterprise income tax, personal income tax and value-added tax.
The structural reform in tax system, which will reduce tax burdens for some industries while increasing taxes on other industries, will also make the primary distribution more rational and effective.
The reform will have a great impact on the country's future economic development.
Since China will continue to develop its economy, it has to speed up technical upgrading of its traditional industries.
Value-added Tax
The government should reform the value-added tax mechanism and map out other tax favors to back the move.
China is now practicing a production-based value-added tax system.
Under the system, fixed assets are classified as consumer goods and are subject to the tax.
As a result, enterprises may not claim tax deductions for the purchase of fixed assets such as equipment and machinery.
The system places a heavy burden on enterprises wanting to increase their fixed assets investment, especially for capital and technology-intensive enterprises.
The system thus poses a hurdle to economic restructuring.
China may gradually phase in the consumption-based value-added tax one sector at a time, starting with industries with heavier value-added tax burdens like the high-tech and infrastructure industries.
The conversion of the system could take place in two phases. Initially, enterprises may be allowed to deduct the input value-added tax for the current year's acquisition of machinery and equipment. Later, enterprises may be allowed to deduct the input value-added tax of purchased real properties.
Besides shifting to a consumption-based system, the value-added tax system should be expanded to cover more activities currently subject to business tax such as transportation and telecommunications.
Enterprise Income Tax
Now that China is a World Trade Organization member, it is urgent that the country should unify enterprise income tax policies.
The country is now practicing dual-track enterprise income tax policies for domestic and foreign-funded companies.
The income tax rate for domestic companies was 33 percent, while that for foreign-funded companies stood at 17 percent.
The country should implement the national treatment for domestic and foreign-funded companies so that they could compete on an equal footing.
Meanwhile, the government should lower the threshold for approving small and medium-sized companies.
Income Gap
In recent years, the income gap between the rich and the poor in China has come close to the international warning level.
With an aim to protect the interests of medium and low-income people, the government should speed up reforms of the personal income tax law.
Personal income tax has become a hot topic in recent years, because the threshold for taxation which stands at 800 yuan (US$96) was considered low and some rich people managed to avoid paying taxes.
The present personal income tax rates vary in 11 categories based on income sources - and this system does not have much control over an individual's total annual income.
Additional incomes are not usually taxed, unless people declare it themselves.
The system has many loopholes which tax evaders can take advantage of.
The author is a senior researcher with the Taxation Research Institute under the State Administration of Taxation.
(China Daily April 21, 2003)
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